Small Business Administration 7(a) Loan Guaranty Program

Transcription

1 Small Business Administration 7(a) Loan Guaranty Program Robert Jay Dilger Senior Specialist in American National Government July 1, 2015 Congressional Research Service R41146

2 Summary The Small Business Administration (SBA) administers several programs to support small businesses, including loan guaranty programs designed to encourage lenders to provide loans to small businesses that might not otherwise obtain financing on reasonable terms and conditions. The SBA s 7(a) loan guaranty program is considered the agency s flagship loan program. Its name is derived from Section 7(a) of the Small Business Act of 1953 (P.L , as amended), which authorizes the SBA to provide business loans and loan guaranties to American small businesses. In FY2014, the SBA approved 52,044 7(a) loans totaling $19.2 billion. The average approved 7(a) loan amount was $368,737. Proceeds from 7(a) loans may be used to establish a new business or to assist in the operation, acquisition, or expansion of an existing business. Congressional interest in the 7(a) program has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery. Some, including President Obama, argue that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations with the expectation that in so doing small businesses will create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, financial credit market reforms, and fiscal restraint as the best means to help small businesses further economic growth and job creation. This report discusses the rationale provided for the 7(a) program; the program s borrower and lender eligibility standards and program requirements; and program statistics, including loan volume, loss rates, use of proceeds, borrower satisfaction, and borrower demographics. It also examines issues raised concerning the SBA s administration of the 7(a) program, including the oversight of 7(a) lenders and the program s lack of outcome-based performance measures. In addition, the report surveys congressional action taken during the 111 th Congress to enhance small businesses access to capital, including providing more than $1.1 billion to temporarily subsidize the 7(a) and 504/Certified Development Companies (CDC) loan guaranty programs fees and temporarily increase the 7(a) program s maximum loan guaranty percentage to 90% (funding was exhausted on January 3, 2011); raising the 7(a) program s gross loan limit from $2 million to $5 million; and establishing an alternative size standard for the 7(a) and 504/CDC loan programs. This report also discusses the Obama Administration s decision to waive the up-front loan guaranty fee and ongoing servicing fee for 7(a) loans of $150,000 or less approved in FY2014 and FY2015; the up-front, one-time loan guaranty fee for veteran loans under the SBAExpress program (up to $350,000) from January 1, 2014, through the end of FY2015 (called the Veterans Advantage Program); and 50% of the up-front loan guaranty fee on all non-sbaexpress 7(a) loans to veterans exceeding $150,000 in FY2015. It also examines legislation introduced during the 114 th Congress (H.R. 2499, the Veterans Entrepreneurship Act of 2015, and S. 957, the Veterans Entrepreneurship Act) to authorize and make permanent the up-front, one-time loan guaranty fee for veteran loans under the SBAExpress program. The Appendix to this report provides a brief description of the 7(a) program s SBAExpress, Export Express, and Community Advantage programs. Congressional Research Service

3 Contents Small Business Administration Loan Guaranty Programs... 1 Borrower Eligibility Standards and Program Requirements... 4 Borrower Eligibility Standards... 4 Borrower Program Requirements... 5 Use of Proceeds... 5 Loan Amounts... 5 Loan Terms, Interest Rate, and Collateral... 6 Lender Eligibility Standards and Program Requirements... 7 Lender Eligibility Standards... 7 CLP and PLP Lenders... 8 Lender Program Requirements... 9 The Application Process... 9 SBA Guaranty and Servicing Fees Lender Packaging, Servicing, and Other Fees Program Statistics Loan Volume Appropriations for Loan Subsidy Costs Administrative Expenses Use of Proceeds and Borrower Satisfaction Borrower Demographics Congressional Issues Access to Capital Program Administration Oversight of 7(a) Lenders Outcome-Oriented Performance Measures Legislative Activity During the 111 th Congress The Obama Administration s Proposals Arguments for Increasing the SBA s Maximum Loan Limits Arguments Against Increasing the SBA s Maximum Loan Limits P.L , the American Recovery and Reinvestment Act of 2009 (ARRA) P.L , the Small Business Jobs Act of Legislative Activity During the 112 th Congress Legislative Activity During the 113 th Congress Legislative Activity During the 114 th Congress Concluding Observations Tables Table 1. SBA Annual Service and Guaranty Fees, FY2013-FY Table 2. 7(a) Loan Guaranty Program, Loan Volume, FY2007-FY Table 3. Business Loan Credit Subsidies, 7(a) and 504/CDC Loan Guaranty Programs, FY2007-FY Congressional Research Service

4 Appendixes Appendix. 7(a) Specialized Programs Contacts Author Contact Information Congressional Research Service

5 Small Business Administration Loan Guaranty Programs The Small Business Administration (SBA) administers programs to support small businesses, including loan guaranty programs to encourage lenders to provide loans to small businesses that might not otherwise obtain financing on reasonable terms and conditions. 1 The SBA s 7(a) loan guaranty program is considered the agency s flagship loan program. 2 It name is derived from Section 7(a) of the Small Business Act of 1953 (P.L , as amended), which authorizes the SBA to provide business loans to American small businesses. The SBA also administers several 7(a) subprograms that offer streamlined and expedited loan procedures for particular groups of borrowers, including the SBAExpress, Small Loan Advantage, and Community Advantage Pilot programs (see the Appendix for additional details). Although these subprograms have their own distinguishing eligibility requirements, terms, and benefits, they operate under the 7(a) program s authorization. 3 Proceeds from 7(a) loans may be used to establish a new business or to assist in the operation, acquisition, or expansion of an existing business. Specific uses include to acquire land (by purchase or lease); improve a site (e.g., grading, streets, parking lots, and landscaping); purchase, convert, expand, or renovate one or more existing buildings; construct one or more new buildings; acquire (by purchase or lease) and install fixed assets; purchase inventory, supplies, and raw materials; finance working capital; and refinance certain outstanding debts. 4 In FY2014, the SBA approved 52,044 7(a) loans totaling $19.2 billion. 5 As will be discussed, the total number and amount of SBA 7(a) loans approved (and actually disbursed) declined in FY2008 and FY2009, increased during FY2010 and FY2011, declined somewhat in FY2012, and increased in FY2013 and FY2014. Historically, one of the justifications presented for funding the SBA s loan guaranty programs has been that small businesses can be at a disadvantage, compared with other businesses, when trying 1 U.S. Small Business Administration (SBA), Fiscal Year 2010 Congressional Budget Justification, p U.S. Congress, House Committee on Small Business, Subcommittee on Finance and Tax, Subcommittee Hearing on Improving the SBA s Access to Capital Programs for Our Nation s Small Business, 110 th Cong., 2 nd sess., March 5, 2008, H.Hrg (Washington: GPO, 2008), p SBA, Small Loan Advantage and Community Advantage 7(a) Loan Initiatives, at headquarters/oca/resources/ The SBA also administers several special purpose loan guaranty programs that address particular business needs, including the Export Express Loan Program, International Trade Loan Program, Export Working Capital Program, the Community Adjustment and Investment Program (CAIP), CAPLines Program, Employee Trusts Program, and Pollution Control Program. The Pollution Control Program is currently not funded. See SBA, Special Purpose Loans Program, at C.F.R SBA, SBA Lending Statistics for Major Programs (as of 9/30/2014), at aboutsbaarticle/websitereport_asof9_30_2014.pdf. The number of 7(a) loans approved annually is typically about 10% to 20% higher than the number of loans disbursed (e.g., some borrowers decide not to accept the loan or there is a change in business ownership). The amount of 7(a) loans approved annually is typically about 10% to 15% higher than the amount disbursed. In FY2013, the SBA approved 46,399 7(a) loans amounting to more than $17.8 billion. In FY2012, the SBA approved 44,377 7(a) loans amounting to more than $15.1 billion. Congressional Research Service 1

6 to obtain access to sufficient capital and credit. 6 Congressional interest in the 7(a) loan program has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery. Some, including President Obama, argue that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations with the expectation that in so doing small businesses will create jobs. Others worry about the longterm adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to help small businesses further economic growth and job creation. This report discusses the rationale provided for the 7(a) program; the program s borrower and lender eligibility standards and program requirements; and program statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction, and borrower demographics. It also examines issues raised concerning the SBA s administration of the 7(a) program, including the oversight of 7(a) lenders and the program s lack of outcome-based performance measures. It then surveys congressional action taken during the 111 th Congress to provide the SBA additional resources to help small businesses gain greater access to capital. For example, P.L , the American Recovery and Reinvestment Act of 2009 (ARRA), provided the SBA an additional $730 million, including $375 million to temporarily subsidize the 7(a) and 504/ Certified Development Companies (CDC) loan guaranty programs fees ($299 million) and to temporarily increase the 7(a) program s maximum loan guaranty percentage to 90% ($76 million). 7 P.L , the Small Business Jobs Act of 2010, provided $505 million (plus $5 million for administrative expenses) to extend the fee subsidies and 90% loan guaranty percentage through December 31, 2010; increased the 7(a) program s gross loan limit from $2 million to $5 million; and established an alternative size standard for the 7(a) and 504/CDC loan programs to enable more small businesses to qualify for assistance. P.L , the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies and the 7(a) program s 90% maximum loan guaranty percentage through March 4, 2011, or until available funding was exhausted (which occurred on January 3, 2011). In addition, this report discusses three bills introduced during the 112 th Congress that would have changed the 7(a) program. S. 1828, a bill to increase small business lending (and for other purposes) would have reinstated for one year following the date of its enactment the fee subsidies for the 7(a) and 504/CDC loan guaranty programs and the 90% loan guaranty percentage for the 6 U.S. Government Accountability Office (GAO), Small Business Administration: 7(a) Loan Program Needs Additional Performance Measures, GAO T, November 1, 2007, pp. 3, 9-11, at d08226t.pdf; and Veronique de Rugy, Why the Small Business Administration s Loan Programs Should Be Abolished, American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, at Proponents of federal funding for the SBA s loan guarantee programs also argue that small businesses can promote competitive markets. See P.L , 2(a), as amended; and 15 U.S.C. 631a. 7 SBA, Recovery Act Agency Plan, May 15, 2009, at sba_recovery_act_plan.pdf. Congressional Research Service 2

7 7(a) program, which were originally authorized by ARRA. H.R. 2936, the Small Business Administration Express Loan Extension Act of 2011, would have extended a one-year increase in the maximum loan amount for the SBAExpress program from $350,000 to $1 million for an additional year. That temporary increase was authorized by P.L and expired on September 27, S. 532, the Patriot Express Authorization Act of 2011, would have provided statutory authorization for the Patriot Express Pilot Program and increased its loan guaranty percentages and its maximum loan amount from $500,000 to $1 million. The Patriot Express Pilot Program was subsequently discontinued by the SBA on December 31, This report also discusses the Obama Administration s decision to waive the up-front loan guaranty fee and ongoing servicing fee for 7(a) loans of $150,000 or less approved in FY2014 and FY2015. During the 113 th Congress, H.R. 2462, the Small Business Opportunity Acceleration Act of 2013, would have made this fee waiver permanent. In addition, the Administration has decided to waive the up-front, one-time loan guaranty fee for veteran loans under the SBAExpress program (up to $350,000) from January 1, 2014, through the end of FY2015 (called the SBA Veterans Advantage Program). 8 The Administration is also waiving 50% of the up-front loan guaranty fee on all non-sbaexpress 7(a) loans to veterans exceeding $150,000 in FY There have been several legislative efforts to statutorily authorize or make permanent the Veterans Advantage Program. During the 113 th Congress, S. 2143, the Veterans Entrepreneurship Act, would have authorized the fee waiver and made it permanent. P.L , the Consolidated and Further Continuing Appropriations Act, 2015, provided statutory authorization to waive the 7(a) SBAExpress program s guarantee fee for veterans (and their spouses) in FY2015. During the 114 th Congress, the Veterans Entrepreneurship Act was reintroduced on April 15, 2015 (S. 957). In addition, H.R. 2499, the Veterans Entrepreneurship Act of 2015, introduced on May 21, 2015, would authorize the fee waiver and make it permanent, subject to the 7(a) loan guaranty program, in its entirety, not having a subsidy cost. 10 On June 10, 2015, the Senate Committee on Small Business and Entrepreneurship reported S. 957 and the House Committee on Small Business reported H.R The Appendix to this report provides a brief description of the 7(a) program s SBAExpress, Export Express, and Community Advantage programs. 8 The small business must be owned and controlled (51%+) by one or more of the following groups: veteran, active duty military in the Transition Assistance Program, reservist or National Guard member, a spouse of any of these groups, or a widowed spouse of a servicemember or veteran who died during service or of a service-connected disability. 9 SBA, SBA Information Notice: SBA Veterans Advantage Renewal and Expansion of Fee Relief, September 19, 2014, at 10 U.S. Congress, House Committee on Small Business, Veterans Entrepreneurship Act of 2015, report to accompany H.R. 2499, 114 th Cong., 1 st sess., June 25, 2015, H.Rept (Washington: GPO, 2015), p. 9. Congressional Research Service 3

8 Borrower Eligibility Standards and Program Requirements Borrower Eligibility Standards To be eligible for an SBA business loan, a small business applicant must be located in the United States; be a for-profit operating business (except for loans to eligible passive companies); qualify as small under the SBA s size requirements; 11 demonstrate a need for the desired credit; and be certified by a lender that the desired credit is unavailable to the applicant on reasonable terms and conditions from nonfederal sources without SBA assistance. 12 To qualify for an SBA 7(a) loan, applicants must be creditworthy and able to reasonably assure repayment. SBA requires lenders to consider the strength of the business and the applicant s character, reputation, and credit history; experience and depth of management; past earnings, projected cash flow, and future prospects; ability to repay the loan with earnings from the business; sufficient invested equity to operate on a sound financial basis; potential for long-term success; nature and value of collateral (although inadequate collateral will not be the sole reason for denial of a loan request); and affiliates effect on the applicant s repayment ability For further analysis, see CRS Report R40860, Small Business Size Standards: A Historical Analysis of Contemporary Issues, by Robert Jay Dilger C.F.R ; and 13 C.F.R A list of ineligible businesses, such as nonprofit businesses, insurance companies, and businesses deriving more than one-third of gross annual revenue from legal gambling activities, is contained in 13 C.F.R C.F.R Congressional Research Service 4

9 Borrower Program Requirements Use of Proceeds Borrowers may use 7(a) loan proceeds to establish a new business or to assist in the operation, acquisition, or expansion of an existing business. 7(a) loan proceeds may be used to acquire land (by purchase or lease); improve a site (e.g., grading, streets, parking lots, landscaping), including up to 5% for community improvements such as curbs and sidewalks; purchase one or more existing buildings; convert, expand, or renovate one or more existing buildings; construct one or more new buildings; acquire (by purchase or lease) and install fixed assets; purchase inventory, supplies, and raw materials; finance working capital; and refinance certain outstanding debts. 14 Borrowers are prohibited from using 7(a) loan proceeds to refinance existing debt where the lender is in a position to sustain a loss and the SBA would take over that loss through refinancing; effect a partial change of business ownership or a change that will not benefit the business; permit the reimbursement of funds owed to any owner, including any equity injection or injection of capital for the business s continuance until the loan supported by the SBA is disbursed; repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow; or pay for a non-sound business purpose. 15 Loan Amounts As mentioned previously, P.L increased the 7(a) program s maximum gross loan amount for any one 7(a) loan from $2 million to $5 million (up to $3.75 million maximum guaranty). In FY2014, the average approved 7(a) loan amount was $368, C.F.R C.F.R ; and SBA, Use of 7(a) Loan Proceeds, at 16 SBA, SBA Lending Statistics for Major Programs (as of 9/30/2014), at aboutsbaarticle/websitereport_asof9_30_2014.pdf. Congressional Research Service 5

10 Loan Terms, Interest Rate, and Collateral Loan Terms A 7(a) loan is required to have the shortest appropriate term, depending upon the borrower s ability to repay. The maximum term is 10 years, unless the loan finances or refinances real estate or equipment with a useful life exceeding 10 years. In that case, the loan term can be up to 25 years, including extensions. 17 Interest Rate Lenders are allowed to charge borrowers a reasonable fixed interest rate or, with the SBA s approval, a variable interest rate. 18 The SBA uses a multistep formula to determine the maximum allowable fixed interest rate and periodically publishes that rate and the maximum allowable variable interest rate in the Federal Register. 19 The maximum allowable fixed interest rates in June 2015 for 7(a) loans with maturities of less than seven years are 7.41% for loans greater than $50,000, 8.41% for loans over $25,000 but not exceeding $50,000, and 9.41% for loans of $25,000 or less. The maximum allowable fixed interest rates in June 2015 for 7(a) loans with maturities of seven years or more are 7.91% for loans greater than $50,000, 8.91% for loans over $25,000 but not exceeding $50,000, and 9.91% for loans of $25,000 or less. 20 The 7(a) program s maximum allowable variable interest rate may be pegged to the lowest prime rate (3.25% in June 2015), the 30-day LIBOR rate plus 300 basis points (3.18% in June 2015), or the SBA optional peg rate (2.250% in the fourth quarter of FY2015). 21 The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan C.F.R A portion of a 7(a) loan used to acquire or improve real property may have a term of 25 years plus an additional period needed to complete the construction or improvements C.F.R For fixed interest rates, the SBA first calculates a fixed base rate using the 30 day London Interbank Offered Rate (LIBOR) in effect on the first business day of the month as published in a national financial newspaper published each business day, adds to that 300 basis points (3%) and the average of the 5-year and 10-year LIBOR swap rates in effect on the first business day of the month as published in a national financial newspaper published each business day. For 7(a) fixed loans with maturities of less than seven years, the SBA adds 2.25% to the fixed base rate to arrive at the maximum allowable fixed rate. For 7(a) fixed loans with maturities of seven years or longer, the SBA adds 2.75% to the fixed base rate to arrive at the maximum allowable fixed rate. Lenders may increase the maximum fixed interest rate allowed by an additional 1% if the fixed rate loan is over $25,000 but not exceeding $50,000, and by an additional 2% if the fixed rate loan is $25,000 or less. See SBA, Business Loan Program Maximum Allowable Fixed Rate, 74 Federal Register , September 30, Colson Services Corp., SBA Base Rates, New York, at 21 Ibid; and SBA, Welcome Lenders, at 22 SBA, 7(a) Loan Program: Terms and Conditions, at Congressional Research Service 6

11 Collateral For 7(a) loans of $25,000 or less, the SBA does not require lenders to take collateral. For 7(a) loans exceeding $25,000 to $350,000, the lender must follow the collateral policies and procedures that it has established and implemented for its similarly sized non-sba-guaranteed commercial loans. However, the lender must, at a minimum, obtain a first lien on assets financed with loan proceeds, and a lien on all of the applicant s fixed assets to secure the loan. For 7(a) loans exceeding $350,000, the SBA requires lenders to collateralize the loan to the maximum extent possible up to the loan amount. 23 If business assets do not fully secure the loan, the lender must take available equity in the principal s personal real estate (residential and investment) as collateral. 24 7(a) loans are considered fully secured if the lender has taken security interests in all available fixed assets with a combined net book value up to the loan amount. 25 The SBA directs lenders to not decline a loan solely on the basis of inadequate collateral because one of the primary reasons lenders use the SBA-guaranteed program is for those Small Business Applicants that demonstrate repayment ability but lack adequate collateral to fully repay the loan if the loan defaults. 26 Lender Eligibility Standards and Program Requirements Lender Eligibility Standards Lenders must have a continuing ability to evaluate, process, close, disburse, service, and liquidate small business loans; be open to the public for the making of such loans (and not be a financing subsidiary, engaged primarily in financing the operations of an affiliate); have continuing good character and reputation; and be supervised and examined by a state or federal regulatory authority, satisfactory to the SBA. They must also maintain satisfactory performance, as determined by the SBA through on-site review/examination assessments, historical performance measures (such as default rate, purchase rate, and loss rate), and loan volume to the extent that it affects performance measures. 27 In FY2014, 2,244 lenders provided 7(a) loans SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), p. 167, at 24 Ibid. 25 Ibid., p Net book value is defined as an asset s original price minus depreciation and amortization. New machinery and equipment may be valued at 75% of Net Book Value, or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of fully-secured. Used or existing machinery and equipment may be valued at 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens for the calculation of fully-secured. Real estate can be valued supported at 85% of the value for the calculation of fully-secured. If the loan will be secured by the fixed assets and the valuation of fixed assets is greater than their depreciated value (net book value), an independent appraisal by a qualified individual must be obtained by the lender to support the higher valuation. 26 Ibid., p C.F.R SBA, Fiscal Year 2016 Congressional Budget Justification and FY 2014 Annual Performance Report, p. 42. There (continued...) Congressional Research Service 7

12 CLP and PLP Lenders The SBA established the Certified Lenders Program (CLP) on February 26, 1979, initially on a six-month pilot basis. 29 It is designed to provide expeditious service on 7(a) loan applications received from lenders who have a successful SBA lending track record and a thorough understanding of SBA policies and procedures. CLP lenders submit the same application forms and documentation required of standard 7(a) loan packages. They must also prepare a draft of the SBA Authorization (of loan guaranty approval). The SBA loan reviewer relies heavily on the information the lender provides. 30 If the lender s presentation is not adequate for CLP processing, the SBA may convert the application from CLP processing to standard loan processing. In recent years, CLP lenders have approved about 1.0% of the number of 7(a) loans approved each year and 2.4% of the amount of 7(a) loans approved each year. 31 The SBA started the Preferred Lenders Program (PLP) on March 1, 1983, initially on a pilot basis. 32 It is designed to streamline the procedures necessary to provide financial assistance to small businesses by delegating the final credit decision and most servicing and liquidation authority and responsibility to carefully selected PLP lenders. 33 PLP loan approvals are subject only to a brief eligibility review and the assignment of a loan number by SBA. 34 PLP lenders draft the SBA Authorization (of loan guaranty approval) without the SBA s review, and execute it on behalf of the SBA. In recent years, PLP lenders have approved about 27.2% of the number of 7(a) loans approved each year and about 56.8% of the amount of 7(a) loans approved each year. 35 PLP lenders must comply with all of the SBA s business loan eligibility requirements, credit policies, and procedures. The PLP lender is required to stay informed on, and apply, all of the SBA s loan program requirements. They must also complete and retain in the lender s file all forms and documents required of standard 7(a) loan packages. 36 (...continued) were 2,345 active 7(a) lenders in FY2013, and 2,476 active 7(a) lenders in FY U.S. Congress, Senate Select Committee on Small Business, SBA Loan Oversight, hearing on SBA loan oversight, 96 th Cong., 1 st sess., September 18, 1997 (Washington: GPO, 1997), p. 31; and U.S. General Accounting Office, SBA s Pilot Programs to Improve Guaranty Loan Procedures Need Further Development, CED-81-25, February 2, 1981, p. 7, at and U.S. General Accounting Office, SBA s Certified Lenders Program Falls Short of Expectations, RCED-83-99, June 7, 1983, p. 1, at 30 SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), p. 19, at 31 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 21, U.S. General Accounting Office, SBA s Certified Lenders Program Falls Short of Expectations, RCED-83-99, June 7, 1983, p. 3, at 33 U.S. General Accounting Office, Small Business: Analysis of SBA s Preferred Lenders Program, GAO/RCED , May 15, 1992, pp. 1-4, 34 SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), pp , at 35 PLP lenders approved 12,570 7(a) loans totaling $11.7 billion in FY2014, 13,457 7(a) loans totaling $10.4 billion in FY2013, 12,472 7(a) loans totaling $8.4 billion in FY2012, and 15,228 7(a) loans totaling $10.7 billion in FY2011. See SBA, SBA Lending Statistics for Major Programs (as of 9/30/2014), at aboutsbaarticle/websitereport_asof9_30_2014.pdf. 36 SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), pp , at Congressional Research Service 8

13 Lender Program Requirements The Application Process Borrowers submit applications for a 7(a) business loan to private lenders. The lender reviews the application and decides if it merits a loan on its own or if it has some weaknesses which, in the lender s opinion, do not meet standard, conventional underwriting guidelines and require additional support in the form of an SBA guaranty. The SBA guaranty assures the lender that if the borrower does not repay the loan and the lender has adhered to all applicable regulations concerning the loan, the SBA will reimburse the lender for its loss, up to the percentage of the SBA s guaranty. The small business borrowing the money remains obligated for the full amount due. If the lender determines that it is willing to provide the loan, but only with an SBA guaranty, it submits the application for approval to the SBA s Loan Guaranty Processing Center (LGPC) through the SBA s E-Tran (Electronic Loan Processing/Servicing) website or, if attachments to the application are too large for E-Tran, by secured electronic file transfer. The LGPC has two physical locations: Citrus Heights, CA, and Hazard, KY. 37 This center has responsibility for processing 7(a) loan guaranty applications for lenders who do not have delegated authority to make 7(a) loans without the SBA s final approval. 38 The SBA has authorized PLP and express lenders to make credit decisions without SBA review prior to loan approval. However, the PLP and express lender s analysis is subject to the SBA s review and determination of adequacy when the lender requests the SBA to purchase its guaranty and when the SBA is conducting a review of the lender. 39 As an additional safeguard against the potential for loan defaults, the SBA now requires all nonexpress 7(a) loans of $350,000 or less to be SBA credit scored through E-Tran prior to submission/approval. 40 If the credit score is below the minimum set by the SBA, the loan may only be submitted as a standard 7(a) application or as an SBAExpress loan (for a 50% guaranty) if the lender is a SBAExpress lender. 37 Ibid., p GAO, Small Business Administration: Opportunities Exist to Build on Leadership s Efforts to Improve Agency Performance and Employee Morale, GAO , September 24, 2008, p. 3, at d08995.pdf. 39 SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), p. 163, at 40 The SBA s credit scoring requirement was initially required of Small Loan Advantage loans, effective June 1, See SBA, SBA Information Notice : Revised and Expanded Small Loan Advantage Changes Incorporated into SOP (E), May 25, 2012, at The SBA s credit scoring requirement was expanded to all non-express 7(a) loans of $350,000 or less on January 1, See SBA, SOP (F): Lender and Development Company Loan Programs, (effective January 1, 2014), p. 161, at Clean%20FINAL%20SOP%2050%2010%205%20%28F%29.pdf. The SBA calculates the credit score based on a combination of consumer credit bureau data, business bureau data, borrower financials, and application data. The minimum acceptable credit score is based on the lower end of the risk profile of the current SBA portfolio and may be adjusted up or down from time to time. Congressional Research Service 9

14 If the credit score is acceptable to the SBA, the lender is a PLP lender, and the loan is eligible to be processed under the PLP lender s delegated authority, the lender will receive an SBA loan number indicating that the loan is approved. 41 The PLP lender s documentation, including underwriting, closing, and servicing, must be maintained in their files, and can be reviewed by the SBA at any time. If the lender is not a PLP lender or if the loan is not eligible to be submitted under the PLP lender s delegated authority, E-Tran will generate a message instructing the lender to send application forms, along with the SBA loan application number provided by E-Tran, to the LGPC for processing. 42 The application materials required for a SBA guaranty vary depending on the size of the loan ($350,000 or less versus exceeding $350,000) and the method of processing used by the lender (standard versus expedited/express). Application packages must include the forms and documentation the lender requires in order to make an informed eligibility and credit decision and the information provided must be certified by the applicant as true and complete. 43 The following SBA documentation is required for all 7(a) standard loans of $350,000 or less: Form 1919: Borrower Information Form. SBA form 1919 provides information about the borrower (name, name of business, social security number, date and place of birth, gender, race, veteran, etc.); the loan request; any indebtedness; the principals and affiliates; current or previous government financing; the applicant s eligibility (e.g., criminal information, citizenship status); the loan s eligibility for delegated or expedited processing (e.g., the borrower is not more than 60 days delinquent in child support payments, not proposed or presently excluded from participation in this transaction by any federal department or agency, has no potential for a conflict of interest due to an owner being a current or former SBA employee, a Member of Congress, a SCORE volunteer, etc.), and, among other disclosures, the firm s existing number of employees, the number of jobs to be created as a result of the loan, and the number of jobs that will be retained as a result of the loan that would have otherwise been lost. 44 Form 912: Statement of Personal History. SBA form 912 is required if the borrower reports on Form 1919 an arrest in the past six months for a criminal offense or had ever been convicted, plead guilty, plead nolo contender, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment) of any criminal offense. 45 Form If the PLP lender indicates that the loan is eligible to be processed under the PLP lender s delegated authority, the lender is also certifying that SBA Form 1920 has been completed, signed, dated, and filed in the loan file. 42 Ibid., p Ibid., pp SBA, SBA Form 1919: Borrower Information Form for use with all 7(a) Programs, at default/files/forms/sba%201919_ssn_1.pdf. 45 SBA, SBA Form 912: Statement of Personal History, at SBA%20%20Form%20912%20% pdf. The lender is required to process a background check and character determination if the borrower has been arrested in the past six months for any criminal offense or if the borrower has ever been convicted, plead guilty, plead nolo contender, been placed on pretrial diversion, or been placed on any form of parole or probation (including probation before judgment) of any criminal offense Congressional Research Service 10

15 requires the borrower to furnish details concerning his or her offense(s) and authorizes the SBA s Office of Inspector General to request criminal record information about the applicant from criminal justice agencies for determining program eligibility. It must be dated within 90 days of the application s submission to the SBA. Form 159: Fee Disclosure and Compensation Agreement. SBA form 159 is required if the borrower reports on Form 1919 that he or she used (or intends to use) a packager, broker, accountant, lawyer, etc. to assist in preparing the loan application or any related materials. 46 SBA form 159 is also required if the lender retains the services of a packager, broker, accountant, lawyer, etc. to assist in preparing the loan application or any related materials. Form 159 provides identifying information about the packager, broker, accountant, lawyer, etc. and the fees paid to any such person. Form 601: Agreement of Compliance (prohibiting discrimination). SBA form 601 is required if the borrower reports on Form 1919 that more than $10,000 of the loan proceeds will be used for construction. 47 Form 601 certifies that the borrower will cooperate actively in obtaining compliance with Executive Order 11246, which prohibits discrimination on the basis of race, color, religion, sex, or national origin and requires affirmative action to ensure equality of opportunity in all aspects of employment related to federally assisted construction projects in excess of $10,000. Form 1920: Lenders Application for Guaranty for all 7(a) Programs. 48 SBA form 1920 provides identifying information about the lender; the loan type (standard, SBAExpress, Export Express, etc.); loan terms; use of proceeds; the business s size and information about affiliates, if any; the applicant s character; if credit is reasonably available elsewhere; the type of business; potential conflicts of interest; and other information such the number of jobs created or retained. PLP lenders complete the form and retain it in the loan file. Other lenders must submit this form electronically to the LGPC. Verification of Alien Status. Documentation of the U.S. Citizenship and Immigration Services (USCIS) status of each alien is required prior to submission of the application to the SBA. Lender s Credit Memorandum. For loans up to and including $350,000, the Lender s Credit Memorandum includes a brief description of the history of the business and its management; the debt service coverage ratio (net operating income compared to total debt service must be at least 1:1); statement that the lender has reconciled financial data (including seller s financial data) against IRS transcripts; an owner/guarantor analysis (including personal financial condition); lender s discussion of life insurance requirements; explanation and justification for any refinancing; analysis of credit, including lender s rationale for 46 SBA, SBA Form 159: Fee Disclosure and Compensation Agreement, at forms/sba_159_7a.pdf. 47 SBA, SBA Form 601: Agreement of Compliance, at SBA%20601.pdf. 48 SBA, SBA Form 1920: Lenders Application for Guaranty for all 7(a) Programs, at default/files/forms/sba%201920_1.pdf. Congressional Research Service 11

16 recommending approval; for a change of ownership, discussion/analysis of business valuation and how the change benefits the business; discussion of any liens, judgments or bankruptcy filings; and discussion of any other relevant information. For loans exceeding $350,000, the Lender s Credit Memorandum must also include an analysis of collateral and a financial analysis which includes an analysis of the historical financial statements; defining assumptions supporting projected cash flow; and, when used, spread of pro-forma balance sheet, ratio calculations, and working capital analysis. 49 Cash Flow Projections. A projection of the borrower s cash flow, month-bymonth for one year, is required for all new businesses, and when otherwise applicable. The following forms and documentation are also required for 7(a) standard loans exceeding $350,000: Form 413: Personal Financial Statement. SBA form 413 provides detailed information concerning the applicant s assets and liabilities and must be dated within 90 days of submission to the SBA, on all owners of 20% or more (including the assets of the owner s spouse and any minor children), and proposed guarantors. Lenders may substitute their own Personal Financial Statement form. Form 1846: Statement Regarding Lobbying. SBA Form 1846 must be signed and dated by lender. 50 It indicates that if any funds have been paid or will be paid to any person for influencing or attempting to influence an officer or employee of any agency, Member of Congress, an officer or employee of Congress, or an officer or employee of a Member of Congress in connection with this commitment, the lender will complete and submit a Standard Form LLL Disclosure of Lobbying Activities. 51 A copy of Internal Revenue Service (IRS) Form 4506-T, Request for Copy of Tax Return. Lenders must identify the date IRS Form 4506-T was sent to the IRS. For non-delegated lenders, verification of IRS Form 4506-T is required prior to submission of the application to the SBA. For PLP and express lenders, verification of IRS Form 4506-T is required prior the first disbursement. Business Financial Statements and/or tax returns dated within 180 days of the application s submission to the SBA, consisting of (1) year-end balance sheets for the last three years, (2) year-end profit and loss statements for the last three years, (3) reconciliation of net worth, (4) interim balance sheet, and (5) interim profit and loss statements. Affiliate and Subsidiary Financial Statements and/or tax returns dated within 180 days of the application s submission to the SBA, consisting of (1) year-end 49 SBA, Standard 7(a) LGPC 10-Tab Submission Instructions, at LGPC%2010-Tab%20Template_ pdf. 50 SBA, SBA Form 1846: Statement Regarding Lobbying, at bank_sba1846.pdf. 51 U.S. Office of Management and Budget, Standard Form LLL: Disclosure of Lobbying Activities, at Congressional Research Service 12

17 balance sheets for the last three years, (2) year-end profit and loss statements for the last three years, (3) reconciliation of net worth, (4) interim balance sheet, and (5) interim profit and loss statements. A copy of the Lease Agreement, if applicable. A detailed Schedule of Collateral. 52 A detailed List of M&E (machinery and equipment) being purchased with SBA loan proceeds, including cost quotes. If real estate is to be purchased with the loan proceeds, a Real Estate Appraisal, Environmental Investigation Report questionnaire, a cost breakdown, and copy of any Real Estate Purchase Agreements. If purchasing an existing business with loan proceeds, a (1) copy of buy-sell agreement, (2) copy of business valuation, (3) pro forma balance sheet for the business being purchased as of the date of transfer, (4) copy of the seller s financial statements for the last three complete fiscal years or for the number of years in business if less than three years, (5) interim statements no older than 180 days from date of submission to the SBA, and (6) if the seller s financial statements are not available, the seller must provide an alternate source of verifying revenues. An explanation of the type and source of applicant s equity injection. Proper evidence of a borrower s equity injection may include the copy of a check together with proof it was processed, or a copy of an escrow settlement sheet with a bank account statement showing the injection into the business prior to disbursement. A promissory note, gift letter, or financial statement is generally not sufficient evidence. 53 If the borrower is a franchise and is listed on a certification of franchise documents is required. If the franchise is not listed on the registry, a copy of the Franchise Agreement and Federal Trade Commission Disclosure Report of Franchisor must be submitted. 54 SBA Guaranty and Servicing Fees To offset its costs, the SBA is authorized to charge lenders an up-front, one-time guaranty fee and an annual, ongoing service fee for each 7(a) loan approved and disbursed. 55 The SBA s fees vary depending on loan amount and loan maturity. The maximum guaranty fee for 7(a) loans with maturities exceeding 12 months is set by statute and varies depending on the loan amount. 56 The 52 For loans of up to $350,000, if a schedule of collateral is not included, the lender must provide collateral and lienholder information to the Standard 7(a) Loan Guaranty Processing Center to complete the loan authorization. 53 SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), p. 164, at 54 Ibid., p P.L , the Small Business Amendments of 1974, provided the SBA authorization to charge fees to cover administrative expenses and probable losses on its loan guaranty programs. 56 P.L , the Consolidated Appropriations Act, 2005 (Division K Small Business, Section 102. Loan Guaranty Fees) established the SBA s current maximum up-front guaranty fees as: up to 2% of the SBA guaranteed portion of 7(a) loans of $150,000 or less, up to 3% of the SBA guaranteed portion of 7(a) loans exceeding $150,000 but not more (continued...) Congressional Research Service 13

18 fee is a percentage of the SBA guaranteed portion of the loan. On short-term loans (maturities of less than 12 months), the lender must submit the guaranty fee to the SBA with the application for guaranty. The application will not be processed without the fee. On loans with maturities in excess of 12 months, the lender must pay the guaranty fee to the SBA within 90 days of the date of loan approval. Lenders may charge the borrower for the fee after the lender has made the first disbursement of the loan. Lenders are permitted to retain 25% of the guaranty fee on loans with a gross amount of $150,000 or less. 57 The annual service fee cannot exceed 0.55% of the outstanding balance of the SBA s share of the loan and is required to be no more than the rate necessary to reduce to zero the cost to the Administration of making guaranties. 58 The lender s annual service fee to the SBA cannot be charged to the borrower. 59 In FY2013, the SBA charged the maximum fees allowable. As shown in Table 1, the SBA has waived its annual service fee and up-front guaranty fee for all 7(a) loans of $150,000 or less approved in FY2014 and FY2015. It has also reduced its annual service fee for all other 7(a) loans from 0.55% in FY2013 to 0.52% in FY2014 to 0.519% in FY2015. Also, as mentioned previously, the SBA has waived its up-front, one-time loan guaranty fee for all veteran loans under the 7(a) SBAExpress program (up to $350,000) from January 1, 2014, through the end of FY2015 and, in FY2015, for 50% of the up-front loan guaranty fee on all non- SBAExpress 7(a) loans (of $150,001 up to and including $5 million) for veterans. 60 (...continued) than $700,000, and up to 3.5% of the SBA guaranteed portion of 7(a) loans exceeding $700,000. In addition, 7(a) loans with an SBA guaranteed portion in excess of $1 million can be charged an additional 0.25% guaranty fee on the guaranteed amount in excess of $1 million. See 15 U.S.C. 636(a)(18)(a); and SBA, Small Business Jobs Act: Implementation of Conforming and Technical Amendments, 76 Federal Register , October 13, SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), p. 141, at The guaranty fee is refundable if the loan application is withdrawn prior to SBA approval, the SBA declines to guarantee the loan, or the SBA substantially changes the loan terms and those terms are unacceptable to the lender. Also, because the SBA does not approve or decline the credit for PLP loans, PLP lenders are required to send the guaranty fee electronically to within 10 business days from the date the loan number is assigned and before the lender signs the Authorization for the SBA. For SBA Express and Export Express loans with a maturity of 12 months or less, the lender does not send the fee to the processing center with the request for loan number. The lender must pay the guaranty fee within 10 business days from the date the loan number is assigned and before the lender signs the Authorization for SBA U.S.C. 636(a)(23)(a) U.S.C. 636(a)(23)(b). 60 SBA, FY2015 Congressional Budget Justification and FY2013 Annual Performance Report, p. 10, at and SBA, SBA Will Continue to Zero Out Fees on Small Dollar Loans, Expands Relief for Larger Loans to Vets, October 1, 2014, at content/sba-will-continue-zero-out-fees-small-dollar-loans-expands-relief-larger-loans-vets. Congressional Research Service 14

19 Table 1. SBA Annual Service and Guaranty Fees, FY2013-FY2015 Maturity and Gross Loan Amount 12 months or less and $150,000 or less 12 months or less and more than $150,000 Exceeding 12 months and $150,000 or less Exceeding 12 months and $150,001 to $700,000 Annual Service Fee Guaranty Fee FY2013 FY2014 FY2015 FY2013 FY2014 FY % 0.00% 0.00% 0.25% 0.00% 0.00% 0.55% 0.52% 0.519% 0.25% 0.25% 0.25% 0.55% 0.00% 0.00% 2.00% 0.00% 0.00% 0.55% 0.52% 0.519% 3.00% 3.00% 3.00% a Exceeding 12 months and $700,001 to $5,000, % 0.52% 0.519% 3.5% up to $1 million +3.75% over $1 million 3.5% up to $1 million +3.75% over $1 million 3.5% up to $1 million +3.75% over $1 million a Source: U.S. Small Business Administration (SBA), SBA Information Notice: 7(a) and 504 Fees Effective on October 1, 2013, at and U.S. Small Business Administration, SBA Information Notice: 7(a) and 504 Fees Effective October 1, 2014, at sites/default/files/lender_notices/ pdf. Notes: The annual service fee is a percentage of the outstanding balance of the SBA s share of the loan. The guaranty fee is a percentage of the SBA guaranteed portion of the loan. If two or more SBA guaranteed loans are approved within 90 days of each other, the guaranty fee is determined based on the aggregate amount of the loans. Lenders are not permitted to split loans for the purpose of avoiding fees. a. In FY2015, the SBA is waiving 50% of the up-front loan guaranty fee on all non-sbaexpress 7(a) loans to veterans exceeding $150,000 and the up-front, one-time loan guaranty fee for all veteran loans under the 7(a) SBAExpress program (up to $350,000). Because the guaranty fee for loans of $150,000 or less is zero, lenders may not charge a guaranty fee for these loans to the borrower. 61 The Obama Administration argued that the fee waivers for 7(a) loans of $150,000 or less are necessary because the demand for smaller 7(a) loans had fallen and the waiver reduction can be achieved with zero credit subsidy appropriations because the annual fees for larger 7(a) loans will cover the cost for those smaller loans. 62 The Administration also contended that waiving the fees on smaller SBA loans would promote lending to small businesses that face the most constraints on credit access. 63 For context, the SBA approved 34,282 7(a) loans of $150,000 or less, totaling $1.65 billion in FY2010 (13.1% of the total amount approved); 29,682 7(a) loans of $150,000 or less, totaling $1.63 billion in FY2011 (8.3% of the total amount approved); 25,486 7(a) loans of $150,000 or 61 SBA, SBA Information Notice: 7(a) and 504 Fees Effective on October 1, 2013, at default/files/ pdf; and SBA, SBA Information Notice: 7(a) and 504 Fees Effective October 1, 2014, at 62 SBA, Fiscal Year 2014 Congressional Budget Justification and FY 2012 Annual Performance Report, p U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2014: Small Business Administration, p. 164, at Congressional Research Service 15

20 less, totaling $1.43 billion in FY2012 (9.5% of the total amount approved); 24,923 7(a) loans of $150,000 or less, totaling $1.45 billion in FY2013 (8.1% of the total amount approved); and 30,675 7(a) loans of $150,000 or less, totaling $1.86 billion in FY2014 (9.7% of the total amount approved). 64 The SBA also announced that eliminating the annual service and guaranty fees for 7(a) loans of $150,000 or less is part of its broader effort to reduce barriers, attract new lenders, grow loan volumes of existing lenders and improve access to capital for small businesses and entrepreneurs. 65 Some in Congress have questioned whether it is appropriate to require borrowers of larger 7(a) loans to, in effect, subsidize borrowers of smaller 7(a) loans, who might be direct competitors. They have suggested that it might be more appropriate to reduce fees across-the-board without regard to loan size. 66 Lender Packaging, Servicing, and Other Fees The lender may charge an applicant reasonable fees customary for similar lenders in the geographic area where the loan is being made for packaging and other services. The lender must advise the applicant in writing that the applicant is not required to obtain or pay for unwanted services. These fees are subject to SBA review at any time, and the lender must refund any such fee considered unreasonable by the SBA. 67 The lender may also charge an applicant an additional fee if, subject to prior written SBA approval, all or part of a loan will have extraordinary servicing needs. The additional fee cannot exceed 2% per year on the outstanding balance of the part requiring special servicing (e.g., field inspections for construction projects). The lender may also collect from the applicant necessary out-of-pocket expenses, including filing or recording fees, photocopying, delivery charges, collateral appraisals, environmental impact reports that are obtained in compliance with SBA policy, and other direct charges related to loan closing. 68 The lender is prohibited from requiring the borrower to pay any fees for goods and services, including insurance, as a condition for obtaining an SBA guaranteed loan, and from imposing on SBA loan applicants processing fees, origination fees, application fees, points, brokerage fees, bonus points, and referral or similar fees SBA, SBA Lending Statistics for Major Programs (as of 9/30/2012), at SBA%207a%20and%20504%20Gross%20Loan%20Approval%20Volume%20as%20of% pdf; SBA, SBA Lending Statistics for Major Programs (as of 9/30/2013), at SBA%207a%20and%20504%20Gross%20Loan%20Approval%20Volume%20as% pdf; and SBA, SBA Lending Statistics for Major Programs (as of 9/30/2014), at WebsiteReport_asof9_30_2014.pdf. 65 SBA, FY 2014 Congressional Budget Justification and FY 2012 Annual Performance Report, p For example, see Barry Pineles, Chief Counsel, House Committee on Small Business, Hearing Memorandum on The Budget Outlook for Small Business Administration, April 18, 2013, pp , at uploadedfiles/revised_hearing_memo_ pdf C.F.R Ibid.; and SBA, SOP (H): Lender and Development Company Loan Programs, (effective May 1, 2015), pp. 145, 149, at C.F.R A commitment fee may be charged for a loan made under the Export Working Capital Loan Program. Congressional Research Service 16